BP's Tax Deductions from the Gulf Oil Spill

The Congressional Research Service issued a new report earlier this week titled Tax Deductible Expenses: The BP Case. You can find the text of the introduction below, or download a PDF of the full report here, courtesy of the Tax Prof Blog.

Following the release of BP’s second quarter earning statement, which showed a $10 billion reduction in tax liability for oil-spill-related cleanup and expenses, media headlines have generated public concern, and in some cases outrage, over these tax savings. Further, the ability of BP to realize these tax savings has generated a number of inquiries as to how and why BP is entitled to this reduction in tax liability.

BP’s reduction in tax liability is the result of standard business expense deductions and the general ability of taxpayers to claim refunds for previously paid taxes when realizing a net operating loss (NOL) or carrying the loss forward to offset future tax liabilities. Business expense deductions and NOLs play a significant role in enhancing economic efficiency by reducing business-cycle-induced fluctuations and spreading risk. BP has reportedly incurred, or expects to incur, $32 billion in cleanup-related costs and settlements over a multiyear period. Under current law, these costs can be used to offset business income and reduce tax liability. To the extent that these costs generate an NOL, these costs can be used to collect a refund for taxes paid in previous years or carried forward to offset tax liability in future years.

The $10 billion “credit” that appears on BP’s second quarter earnings statement is a financial account of BP’s anticipated tax savings associated with legitimate cleanup-related expenses. The figure does not reflect a tax credit as typically defined in the tax code. The $10 billion reduction in tax liability relates to a multiyear period, over which the $32 billion will be spent. The $32 billion was reported in 2010 for financial reporting purposes, but reflects cleanup spending costs in the current year as well as costs the company expects to incur in future years. The financial account and financial reports do not directly correspond to current year tax liabilities. Actual oilspill- related expenditures will be made over multiple years. Consequently, the associated tax savings will not be realized until the year expenditures are made.

Use your vacation to do something good -- and get a tax write-off

The tragic Gulf oil spill is inspiring people to use their vacation time for good. I applaud these incredibly dedicated people who take the time off work, often traveling long distances, to help those who are in need. Even better, WalletPop.com has an article reminding us that these charitable individuals may be eligible for a tax deduction.

Of course, time volunteered is never deductible, travel and out-of-pocket expenses are. According to the article, to qualify for the deduction, your expenses must be:

1. not otherwise reimbursed;
2. directly connected with the services you're performing;
3. expenses you had only because of the services you performed; and
4. not personal, living, or family expenses.

If your summer vacation finds you helping to clean up wildlife in the Gulf, keep track of your travel expenses, this includes gas and maintenance of your vehicle, any parking fees or tolls you pay if you are within driving distance. You are allowed to claim reasonable travel expenses including air or bus fare, reasonable hotel and meal expenses, and taxi rides for getting to and from the volunteering site.

Remember, you’ll have to itemize your deductions to claim these valuable tax breaks, so make sure you understand your own tax situation to make sure you’ll be eligible.

Of course the main reason to get involved in the cleanup is to help others. But that doesn’t mean you can’t enjoy the tax breaks your generosity gives you.

Read the entire article here.

IRS Provides Tax Help, Guidance to Gulf Oil Spill Victims

Over the weekend, the IRS published a new press release with guidance for individuals and businesses affected by the oil spill in the Gulf of Mexico and announced a number of new efforts to help affected taxpayers, including a special Gulf Coast Assistance Day on July 17.

“This is a very difficult time for many people affected by the oil spill in the Gulf of Mexico. As residents of the region cope with the evolving situation, I want to assure them that the IRS will be doing everything it can to provide tax help to those who need it,” IRS Commissioner Doug Shulman said. “We encourage anyone who has an issue with the IRS to contact us and explain their hardship, and we will work with them to find a solution. We’ll do everything we can under current law to help taxpayers.”

The guidance released today is based on current law, and it explains how recipients of payments from BP should treat the payments for tax purposes. According to the current law, BP payments for lost income are taxable in the same way that the wages or business income these payments are replacing would have been. The law treats compensation for lost wages or income differently for tax purposes than compensation for physical injuries or property loss, which generally are nontaxable.

Every person can have unique financial circumstances, so the IRS encourages taxpayers to review their tax situation or talk with their tax preparers about the implications of payments or compensation from the oil spill.

The new information is available in a question-and-answer format on a special section of the IRS website, IRS.gov. The IRS is closely monitoring the situation in the Gulf, and additional information will be added to IRS.gov as it becomes available.